IR on the front line

As if increasing worries about a global economic slowdown were not enough. If only IR was a matter of publishing a simple profit warning for expected near-term results, as so many companies have done in recent weeks. No, IR officers and consultants in Israel not only have to contend with the uncertain global economic environment, but an increasing public relations disaster as the world's media broadcast vivid images of violence between Palestinians and Israelis on an almost-daily basis.

What started off as a Palestinian expression of anger and frustration last September, with little more than stone throwing and Molotov cocktails, has continued and escalated in some areas. Automatic gunfire, suicide bombers and drive-by shootings have become depressingly common. Israelis are at a loss as to how to explain recent events, generically terming the new state of being as the situation.

How does this situation affect the investor relations community in Israel? Are they huddling in their bunkers, orchestrating a massive PR blitz to counter the news items shown on CNN, BBC and other global media outlets? Perhaps they are sitting this one out, hoping not to add fuel to the fire. Or maybe it's just one big non-event as far as investors are concerned, as they choose instead to focus on fundamentals. The answer depends on which financial sector within Israel you're talking about.

US and them

For the more than 120 Israeli companies whose shares are traded on US securities markets, the Middle East violence appears to be having little, if any, impact at all. According to Ofer Lavie, CFO of Nasdaq-listed Metalink, 'The predominant factor that affects the current share price is the overall global macroeconomic situation.' Lavie goes on to say that 'one bad announcement from a major global high-tech player has much more impact on share prices of Israeli shares traded in New York than anything happening here in Israel.'

Lavie recalls his company's most recent roadshow to the US late last year, when the situation was getting progressively worse. In meetings with over 75 current and potential investors, the violence in Israel was never raised as a major issue.

Goldman Sachs provides extensive coverage of Israeli shares traded on US markets. In a morning note published on October 13, 2000, Goldman states, 'We have argued in the past, and continue to believe, that Israeli technology stocks traded on Nasdaq should not [be] affected by, nor correlated to, political events in Israel. To date, there has been no disruption to communication, transportation or supplies to any Israeli company in our stock universe that we know of.' This message was reiterated roughly a month later in another report.

Since the start of the Q3 2000 through March 15, 2001, the Goldman Sachs Israel Technology Index (a representative benchmark for publicly-traded Israeli technology equities on US exchanges) has declined 58 percent. In the same time period, Nasdaq shaved 53 percent off its value. Goldman analysts attribute the slightly sharper fall of Israeli shares to recent weakness in a few of the index's larger components, not to any political instability in the region.

Local difficulties

The story appears different when looking at the Tel Aviv Stock Exchange, Israel's domestic security market. Here the impact is felt more in trading volume, although prices are declining steeply as well. Whereas before September volumes averaged Shk350-450m a day, nowadays the market struggles to reach Shk200m ($48 mn).

The sharp fall in volume is attributed to two factors, says senior equity analyst Haim Israel of Nessuah Zannex Securities, a local brokerage firm which is allied with US Bancorp Piper Jaffray. 'On one side, the local institutional investors are sitting on the sidelines, concentrating their activities on other areas of investment. Secondly, foreign investors are mostly out of the market. They started selling before the escalation in violence due to technical reasons, but the situation definitely fueled their selling activity.' He points out that the TASE represents 3.5 percent of the Morgan Stanley MSCI EMEA index and accordingly foreign players were previously significant players in the local market.

For those Israeli investors still active in the market - and for the foreigners who remain - the local IR community is taking steps to instill a sense of calm. Sigal Gefen, managing partner at Cubitt Consulting's Tel Aviv office, advises Israeli clients to add one paragraph to third quarter results announcements stating that the companies are not affected by the turmoil and that it's 'business as usual.' 'Had the Palestinian uprising occurred in the middle of the quarter rather than at quarterly announcement time, we probably would have put out a special information paper. But as such, this wasn't necessary,' she adds.

Gefen highlights the case of Delta Galil Industries, a textile manufacturer with factories in neighboring Jordan and Egypt. The company's annual analyst conference in early March was attended by 50-60 analysts. Though attendees did not ask about the political turmoil, Delta did decide to postpone an analyst factory tour to Egypt, choosing to wait until tensions calm down.

Another local IR consulting firm, KM Investor Relations, advises over 30 Israeli companies, several of them dual-listed on US exchanges. CEO Roni Gavrielov says he encourages clients to be proactive in this negative environment. 'Now, because of the added uncertainty, weakness on Nasdaq and the political turmoil, companies should maintain a stronger presence.' Gavrielov is pushing companies to preserve dialogue with the investors and even educate them.

For example, whereas in the past companies may have done two conference calls a year, now they should do more. Gavrielov explains to companies that by communicating well through the bad times they can build a higher level of trust with the investors. 'If companies hide during the bad times, investors will not return so quickly at signs of improvement,' he adds.

'Most Israeli companies do not follow this strategy. Israelis feel they should disappear when things are bad,' says Gavrielov. Accordingly, these days he spends much of his time convincing clients to stay in the public light despite the negative sentiment in the market.

Gavrielov notes that the current situation definitely makes his job more difficult. 'It is harder to get the interest of new and existing investors. In order to satisfy them, you need to do more.' Gavrielov's efforts are focused more on existing investors because 'it is just not practical to bring in new investors now.'

One story Gavrielov highlights is that of Gazit Globe Investments. This Tel Aviv-based company is included in the TASE's TA-100 Index, composed of the 100 most actively-traded shares on the TASE. The company's sole activity is real estate development in the US and Canada. 'No matter what images are being broadcast around the world about Israel, this company is 100 percent unaffected.'

This story echoes Sigal Gefen's view that the current situation presents a good opportunity for investors looking to pick up value. In the go-go days of the high-tech rally last year, investors would jump into shares with minimal research. Now there's no pressure to jump immediately into shares for fear of missing the boat. 'Investors are more rational than in the past and have more free time to seek out value,' Gefen adds.

Venturing out

Venture capital funds have been flocking to Israel's high-tech sector which has, in a sense, evolved into an economy within an economy. It has its own distinct growth drivers, its own methods of financing and marketing, its own labor market with higher standards of pay, and often a different investor base than the Israeli economy in general. Several sources put the level of venture capital investment in Israel in 2000 at just over $3 bn, roughly triple 1999's level.

Vertex Management Israel, part of the Vertex Group that manages over $1 bn globally, runs Israeli venture capital funds with total assets of $250 mn. Sharon Lewis joined the company last July as IR manager: 'Investors who had never been to Israel before had preconceived notions of the country that were almost contradictory,' she explains. 'On one hand, they saw what CNN had broadcast, and on the other hand they saw that Israel had the most companies traded on Nasdaq after the US and Canada. If so many companies on Nasdaq are Israeli, the country obviously has something going on in its technology sector that CNN wasn't reporting.' And so it is high-tech prowess that overcame the misconceptions and raised the eyebrows of international investors interested in getting a piece of the action, despite Israel's negative media reputation.

Lewis continues: 'The political situation has been here since 1948 [the establishment of the modern state of Israel]. Even before the events of September, Israel had a somewhat negative image in the world media, but investors never had it at the front of their minds.'

When the new spate of violence erupted in September, some investors called and expressed concern, Lewis says. 'They just wanted to hear from us what was really happening.' She remarks that her best source of information on the troubles was not from any firsthand experience; she too had to watch CNN to find out what was going on. 'Still, reality differed from the exaggerated broadcasts,' she explains. Indeed, life along the coastal Dan region of Israel (where much of the high-tech sector is situated) has not been affected at all by the turmoil. 'The specific problem areas are not in Israel proper, and that is something most people do not realize.'

Vertex continues its normal procedure of inviting current and potential investors to Israel to see for themselves the wealth of high-tech potential. They still want to know how their investments are doing, what developments are going on in the markets and what other opportunities are on the horizon. Some are apprehensive about going there, but Vertex still entertains visitors from all over the world.

The visits appear to have a positive impact for investors. 'Once investors visit Israel, everything they see on the ground erases what they previously saw on CNN.' And as such, Lewis points out that the political situation, although a major concern, is not a make-or-break issue. 'None have broken off commitments to invest because of the political situation. Investors are continuing to invest.' And for Lewis, investment options in Israel still abound. 'Investment opportunity in Israel still exists. It will be a more sober market looking forward, but investors can still find value within Israel's high-tech sector,' she says.

Peace & prosperity

Israel's political situation may not be as grim as portrayed in the world media, but IR managers and consultants continue, for the most part, to focus on the key fundamentals, looking more towards New York for a turnaround in investor sentiment than to the local political arena.

Everyone hopes for a peaceful solution between the Israelis and the Palestinians but one cannot ignore the challenges that face these two parties, as well as their neighbors. The Israeli economy has prospered through more serious political conflicts in the past and, if the situation does deteriorate further, investors in Israel can take heart in the words of Ofer Lavie, CFO of Metalink: 'In the last 50 years we had many ups and downs in the security situation. Even five wars didn't stop us from prospering.'

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